IRAS issues a circular on transfer pricing consultations

On 30 July 30 2008, the Inland Revenue Authority of Singapore (IRAS) released a new transfer pricing circular introducing the Transfer Pricing Consultation (TP Consultation) process. The salient points of this circular and guidance on the precautionary steps that taxpayers can take to avoid a TP Consultation process are provided below.

What is a TP Consultation?

As a follow up to the Transfer Pricing Guidelines issued on 23 February 2006, IRAS has introduced the TP Consultation process in an effort to, in its words, "help taxpayers comply with the arm's length standard in related party transactions".

The TP Consultation is a consultative process in which IRAS first issues a questionnaire requesting for information on related party transactions. The circular also introduces the possibility of a transfer pricing field audit where IRAS will visit the taxpayer, who is then expected to present relevant information on its business model, organisational structure, related party transactions and compliance with IRAS' transfer pricing guidelines . Based on this assessment, IRAS will provide the taxpayer with its opinion on the adequacy of the taxpayer’s documentation and its assessment on the taxpayer’s transfer pricing risk, taking into account the commercial realism of its business results and the quality of the documentation. In the event that the taxpayer’s pricing deviates significantly from the arm’s length standard, IRAS will express its position and make arrangements with the taxpayer to review the issue at an appropriate time. As can be seen, although referred to as a "consultation", the information requested in this process is similar to that in a normal transfer pricing audit.

Who is likely to be subject to TP Consultation?

Taxpayers with significant related party transactions especially with overseas parties, those with significant losses for a number of years and those with incorrect or inconsistent transfer pricing policies are most likely to be subject to this TP Consultation.

Are you ready?

Since the circular was issued, we have observed that the taxpayers with little or no transfer pricing documentation to support their transactions have moved on to the next phase in the process where IRAS has sought to have a meeting with them on their premises.

In addition, IRAS has been very strict with the deadlines given for taxpayers to gather the initial information for the questionnaire and are reluctant to provide more than a very limited extension of time, preferring instead to seek to have a meeting immediately if a longer extension of time is asked for.

In light of the above, the questionnaires issued by IRAS must be taken seriously as the implications of not doing so would expose the taxpayer to a full scale consultation as outlined above. So if you have been selected for TP Consultation, we urge you to plan ahead, and contact us today. If you are not subject to TP Consultation yet, we would encourage you to take stock of your related party transactions and ensure that they comply with the arm’s length standard and that sufficient documentation exists to support and defend the transfer prices.

How can we help?

We can assist you in preparing for the TP Consultation process and to help mitigate your transfer pricing risk in the following manner:

• Perform a transfer pricing health check, similar to the analysis that IRAS will undertake in the first step of a TP consultation, and provide you with our assessment and solutions to address your transfer pricing concerns.
• Assist in preparing adequate transfer pricing documentation.
• Advise and recommend best practices to be followed from a transfer pricing perspective.
• Assist in structuring intercompany transactions such that they meet the arm’s length standard.
• Any other related services that may be necessary through our review and discussions.